Business -- Waste Management, Inc. and Subsidiaries (the "Company")
provides integrated waste management services throughout North America
consisting of collection, transfer, disposal (including landfill disposal of
hazardous waste), recycling and resource recovery services as well as other
hazardous waste services, and low-level and other radioactive waste services to
commercial, industrial, municipal and residential customers. Additionally, the
Company is a developer, owner and operator of waste-to-energy and waste-fuel
powered independent power facilities. The Company also operates throughout
Europe, the Pacific Rim, South America and other select international markets.
Internationally, the Company collects and transports solid, hazardous and
medical wastes and recyclables from customers and operates solid and hazardous
waste landfills and municipal and hazardous waste incinerators, water and
wastewater treatment facilities, hazardous waste treatment facilities and
constructs treatment or disposal facilities for third parties.

Principles of consolidation -- The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries after elimination of all material intercompany balances and
transactions. Investments in affiliated companies in which the Company owns 50%
or less are accounted for under the equity method or cost method of accounting,
as appropriate.

WM Holdings Merger -- On July 16, 1998, the Company, then known as USA
Waste Services, Inc., completed a merger with Waste Management, Inc., which was
subsequently renamed Waste Management Holdings, Inc. ("WM Holdings") (the "WM
Holdings Merger"). WM Holdings was previously the largest publicly traded solid
waste company in the United States, providing integrated solid waste management
and hazardous waste management services in North America and comprehensive waste
management and related services, including solid and hazardous waste management
services, internationally. At the effective time of the WM Holdings Merger, the
Company changed its name to "Waste Management, Inc." See Note 3.

Eastern Merger -- On December 31, 1998, the Company consummated a merger
transaction with Eastern Environmental Services, Inc. ("Eastern") accounted for
using the pooling of interests method of accounting. Accordingly, the financial
statements have been restated from previously reported financial statements to
include the accounts and operations of Eastern for all periods presented. See
Note 3.

Use of estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts for certain revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and cash equivalents -- Cash and cash equivalents consist primarily of
cash on deposit, certificates of deposit, money market accounts, and investment
grade commercial paper purchased with original maturities of three months or
less.

Short-term investments -- As part of its cash management program, the
Company from time to time maintains a portfolio of marketable investment
securities. The securities have an investment grade and a term to earliest
maturity generally of less than one year, and include tax exempt securities,
certificates of deposit and Eurodollar time deposits. These securities are
carried at cost, which approximates market.

Short-term investments also include marketable securities classified as
"trading," which are carried at market price with unrealized gains and losses
included in other income in the accompanying consolidated statements of
operations. At December 31, 1998, no "trading" securities were held by the
Company. At December 31, 1997, this category included certain other equity
securities classified as "trading" as well as a related price collar. These
securities and a related collar in 1998 were disposed with no gain or loss.

61

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Restricted funds held by trustees -- Restricted funds held by trustees of
$153,030,000 and $190,030,000 at December 31, 1998 and 1997, respectively, are
included in other non-current assets and consist principally of funds deposited
in connection with landfill final closure and post-closure obligations,
insurance escrow deposits, and amounts held for landfill and other construction
arising from industrial revenue financings. These amounts are principally
invested in fixed income securities of federal, state, and local governmental
entities and financial institutions. The Company considers its landfill final
closure, post-closure, and construction escrow investments to be held to
maturity. At December 31, 1998 and 1997, the aggregate fair value of these
investments approximates their amortized costs, and substantially all of these
investments mature within one year. The Company's insurance escrow funds are
invested in pooled investment accounts that hold debt and equity securities and
are considered to be available for sale. The market value of those pooled
accounts approximates their aggregate cost at December 31, 1998 and 1997.

Concentrations of credit risk -- Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents and accounts receivable. The Company places its cash and
cash equivalents with high quality financial institutions and limits the amount
of credit exposure with any one institution. Concentrations of credit risk with
respect to accounts receivable are limited because a large number of
geographically diverse customers make up the Company's customer base, thus
spreading the trade credit risk. At December 31, 1998 and 1997, no single group
or customer represents greater than 10% of total accounts receivable. The
Company controls credit risk through credit approvals, credit limits, and
monitoring procedures. The Company performs credit evaluations for commercial
and industrial customers and performs ongoing credit evaluations of its
customers, but generally does not require collateral to support accounts
receivable.

Derivative financial instruments -- From time to time, the Company uses
derivatives to manage interest rate and currency risk. The Company has, in the
past, engaged in hedging of fuel and equity price risk; however, it had no such
financial instruments outstanding at December 31, 1998. The Company's policy is
to use derivatives for risk management purposes only, and it does not enter into
such contracts for trading purposes. The Company enters into derivatives only
with counterparties which are financial institutions having credit ratings of at
least A- or A3, to minimize credit risk. The amount of gains or losses from the
use of derivative financial instruments have not been and are not expected to be
material to the Company's consolidated financial statements.

Instruments used as hedges must be effective at managing risk associated
with the exposure being hedged and must be designated as a hedge at the
inception of the contract. Accordingly, changes in market values or cash flows
of hedge instruments must have a high degree of inverse correlation with changes
in market values or cash flows of the underlying hedged items. Derivatives that
meet the hedge criteria are accounted for under the deferral or accrual method
as discussed in Note 8.

Property and equipment -- Property and equipment are recorded at cost.
Expenditures for major additions and improvements are capitalized, while minor
replacements, maintenance, and repairs are charged to expense as incurred. When
property and equipment are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the results of operations for the respective period.
Depreciation is provided over the estimated useful lives of the related assets
using the straight-line method. The estimated useful lives for significant
property and equipment categories are as follows (in years):

OCTOBER 1, 1997 PRIOR TO
AND THEREAFTER OCTOBER 1, 1997
--------------- ---------------
Vehicles......................................... 3 to 10 3 to 12
Machinery and equipment.......................... 3 to 20 3 to 20
Commercial and roll-off containers............... 8 to 12 8 to 20
Buildings and improvements....................... 10 to 40 10 to 40

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WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of October 1, 1997, and thereafter, the Company assumed no salvage value
for its depreciable North American fixed assets. Prior to October 1, 1997, WM
Holdings assigned salvage value to certain fixed asset categories as described
in Note 4.

Disposal sites are stated at cost and amortized ratably using the
units-of-production method over the estimated useful life of the site as
airspace of the landfill is consumed. For those sites that the Company believes
permit expansion is probable, the expansion airspace and the projected costs
related to developing the expansion airspace is included in the airspace
amortization rate calculation. Disposal site amortization rates are determined
periodically (not less than annually) for each disposal site based on estimates
provided by the Company's engineers and accountants. Disposal site costs include
expenditures for the acquisition of land and related airspace, engineering and
permitting costs, direct site improvement costs, and capitalized interest.
Disposal site amortization rate calculations consider information provided by
aerial and ground surveys and other density measures. Factors in determining
probable expansions on a site-by-site basis include secured rights to required
land, status of legal, environmental, regulatory and political issues, and the
extent to which the permit application process has proceeded.

Business combinations -- The Company assesses each business combination to
determine whether the pooling of interests or the purchase method of accounting
is appropriate. For those business combinations accounted for under the pooling
of interests method, the financial statements are combined with those of the
Company at their historical amounts, and, if material, all periods presented are
restated as if the combination occurred on the first day of the earliest year
presented. For those acquisitions accounted for using the purchase method of
accounting, the Company allocates the cost of the acquired business to the
assets acquired and the liabilities assumed based on estimates of fair values
thereof. These estimates are revised during the allocation period as necessary
when, and if, information regarding contingencies becomes available to define
and quantify assets acquired and liabilities assumed. The allocation period
varies but does not exceed one year. To the extent contingencies such as
preacquisition environmental matters, litigation and related legal fees are
resolved or settled during the allocation period, such items are included in the
revised allocation of the purchase price. After the allocation period, the
effect of changes in such contingencies is included in results of operations in
the periods in which the adjustments are determined. The Company does not
believe potential deviations between its fair value estimates and actual fair
values will be material.

In certain business combinations, the Company agrees to pay additional
amounts to sellers contingent upon achievement by the acquired businesses of
certain negotiated goals, such as targeted revenue levels, targeted disposal
volumes, or the issuance of permits for expanded landfill airspace. Contingent
payments, when incurred, are recorded as purchase price adjustments or
compensation expense, as appropriate, based on the nature of each contingent
payment.

Excess of cost over net assets of acquired businesses -- The excess of cost
over net assets of acquired businesses is amortized on a straight-line basis
over a period not greater than 40 years commencing on the dates of the
respective acquisitions. Accumulated amortization was $813,638,000 and
$703,656,000 at December 31, 1998 and 1997, respectively.

Other intangible assets -- Other intangible assets consist primarily of
customer lists, covenants not to compete, licenses, permits, and contracts.
Other intangible assets are recorded at cost and amortized on a straight-line
basis. Customer lists are generally amortized over five to seven years.
Covenants not to compete are amortized over the term of the agreement, which is
generally three to five years. Licenses, permits, and contracts are amortized
over the shorter of the definitive terms of the related agreements or 40 years.
Accumulated amortization was $113,312,000 and $110,760,000 at December 31, 1998
and 1997, respectively.

Long-lived assets -- Long-lived assets consist primarily of property and
equipment, excess of cost over net assets of acquired businesses, and other
intangible assets. The recoverability of long-lived assets is evaluated at the
operating unit level by an analysis of operating results and consideration of
other significant

63

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

events or changes in the business environment. If an operating unit has
indications of impairment, such as current operating losses, the Company will
evaluate whether impairment exists on the basis of undiscounted expected future
cash flows from operations before interest for the remaining amortization
period. If impairment exists, the carrying amount of the long-lived assets is
reduced to its estimated fair value.

Contracts in process -- Contracts in process relate to contracts involving
a substantial construction component. Such contracts primarily relate to
activities performed by international operations. The status of the Company's
contracts in process as of the dates indicated is as follows (in thousands):

All contracts in process are expected to be billed and collected within
five years.

Income taxes -- Deferred income taxes are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities. Deferred income tax expense represents the change during the period
in the deferred tax assets and deferred tax liabilities, net of the effect of
acquisitions and dispositions. Deferred tax assets include tax loss and credit
carryforwards and are reduced by a valuation allowance if, based on available
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.

Foreign currency -- The functional currency of the majority of the
Company's foreign operations is the local currency of the country in which the
Company operates. Adjustments resulting from the translation of financial
information are included in comprehensive income.

Revenue recognition -- The Company recognizes revenues on service contracts
as services are provided. Amounts billed and collected prior to services being
performed are included in deferred revenues. Results from long-term contracts
involving a substantial construction component are recorded on the
percentage-of-completion basis. Changes in project performance and conditions,
estimated profitability and final contract settlements may result in future
revisions to long-term construction contract costs and income.

Capitalized interest -- Interest is capitalized on certain projects under
development including greenfield landfill projects and probable landfill
expansion projects, and on certain assets under construction, including
operating landfills and waste-to-energy facilities. The capitalization of
interest for operating landfills is based on the costs incurred on discrete cell
construction projects, plus an allocated portion of the common site costs. The
common site costs include the development costs of a greenfield site or the
purchase price of an operating landfill, and the ongoing infrastructure costs
benefiting the life cycle of the landfill. Cell construction costs

64

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

include the construction of cell liners and construction of final capping during
the operating life of the site. During 1998, 1997, and 1996, total interest
costs were $722,958,000, $606,952,000, and $582,213,000, respectively, of which
$41,501,000, $51,376,000, and $56,873,000, were capitalized, respectively.

New accounting pronouncements -- In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and derivatives used for hedging purposes. SFAS No. 133
requires that entities recognize all derivative financial instruments as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for the Company in 2000.
Management is currently assessing the impact that the adoption of SFAS No. 133
will have on the Company's consolidated financial statements.

In April 1998, the Company adopted the American Institute of Certified
Public Accountants Statement of Position 98-5, Accounting for the Costs of
Start-Up Activities ("SOP 98-5"). SOP 98-5 requires all costs of start-up
activities to be expensed as incurred. Start-up activities are defined as those
one-time activities related to opening a new facility, introducing a new product
or service, conducting business in a new territory, conducting business with a
new class of customer or beneficiary, initiating a new process in an existing
facility, or commencing some new operation. Activities related to mergers or
acquisitions are not considered start-up activities, and therefore SOP 98-5 does
not change the accounting for such items. The impact of SOP 98-5 was not
material to the Company's consolidated financial statements.

Effective January 1, 1997, the Company adopted the American Institute of
Certified Public Accountants Statement of Position 96-1, Environmental
Remediation Liabilities ("SOP 96-1"). SOP 96-1 provides that environmental
remediation liabilities should be accrued when the criteria of the FASB
Statement of Financial Accounting Standards No. 5, Accounting for Contingencies
("SFAS No. 5"), are met. SOP 96-1 also provides that the accrual for such
liabilities should include future costs for those employees expected to devote a
significant amount of time directly to the management of remediation
liabilities. The adoption of SOP 96-1 during 1997 resulted in an increase to
operating costs and expenses of approximately $49,900,000 for that period.

3. BUSINESS COMBINATIONS

1998 Poolings of Interests Transactions

On December 31, 1998, the Company consummated a merger with Eastern
accounted for as a pooling of interests (the "Eastern Merger"), and accordingly,
the accompanying consolidated financial statements have been restated to include
the accounts and operations of Eastern for all periods presented. Under the
terms of the Eastern Merger, the Company issued 0.6406 of a share of its common
stock for each share of Eastern outstanding common stock. Prior to the Eastern
Merger, the Company owned approximately 1.3% of Eastern's outstanding shares,
which were canceled on the effective date of the Eastern Merger. The Eastern
Merger increased the Company's outstanding shares of common stock by
approximately 24,460,000 shares, and the Company assumed Eastern's stock options
equivalent to approximately 2,255,000 underlying shares of the Company's common
stock.

The consolidated balance sheets at December 31, 1998 and 1997 reflect the
combining of (i) the Company prior to consummation of the Eastern Merger ("Waste
Management") and (ii) Eastern as of those dates. Combined and separate results
of operations for the two years ended December 31, 1997, and the nine

65

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

months ended September 30, 1998, of Waste Management and Eastern for the
restated periods are as follows (in thousands):

Prior to December 31, 1997, Eastern reported on a June 30 fiscal year-end.
Therefore, the accounts of Eastern for its 1997 and 1996, fiscal years have been
consolidated with the accounts of the Company as of and for the years ended
December 31, 1997 and 1996, respectively. Operating revenues and net income for
Eastern for the six-month period ended December 31, 1997, were approximately
$119,526,000 and $5,319,000, respectively. Accordingly, an adjustment is
included in the Company's 1998 consolidated financial statements for this
six-month period. In addition, Eastern issued shares of its common stock in
connection with acquisitions and a public offering during the six-month period.

On July 16, 1998, the Company consummated a merger with WM Holdings, which
was accounted for as a pooling of interests and, accordingly, the accompanying
consolidated financial statements include the accounts and operations of WM
Holdings for all periods presented. Under the terms of the WM Holdings Merger,
the Company issued 0.725 of a share of its common stock for each share of WM
Holdings outstanding common stock. The WM Holdings Merger increased the
Company's outstanding shares of common stock by approximately 354,000,000
shares, and the Company assumed WM Holdings' stock options equivalent to
approximately 16,000,000 underlying shares of the Company's common stock. Any
unvested WM Holdings options granted prior to March 10, 1998 vested upon
consummation of the Merger due to change of control provisions.

The results of operations for WM Holdings prior to consummation of the WM
Holdings Merger for the restated periods are as follows (in thousands):

In connection with the WM Holdings Merger and the Eastern Merger, the
Company incurred significant charges in the third and fourth quarters of 1998.
Additionally, the Company expects to incur additional costs throughout 1999 that
are transitional in nature and not accruable until incurred or committed. The
table below reflects the amounts charged to merger costs related to the WM
Holdings Merger and the Eastern Merger, as well as merger costs expected to be
incurred in future periods for the respective transactions (in thousands):

Included in the charges above, are estimates for anticipated losses related
to the sales of assets pursuant to governmental orders. These anticipated losses
have been estimated based on the Company's assessment of relevant facts and
circumstances, including consideration of the various provisions of asset sale
agreements. In certain instances, the asset sale agreements contain
contingencies, the resolution of which are uncertain and could materially change
the proceeds which the Company will ultimately receive. Accordingly, dependent
upon actual future experience and the resolution of certain contingencies, the
amount of losses ultimately recorded by the Company could materially differ from
the amounts recorded by the Company.

Additionally, the Company recorded merger costs of approximately
$17,235,000 related to other poolings of interests transactions consummated
during 1998.

Furthermore, the Company recorded certain unusual charges of $864,063,000
in 1998 that were primarily, yet indirectly related to the WM Holdings Merger as
discussed in Note 14.

67

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1997 Pooling of Interests Transactions

On August 26, 1997, the Company consummated a merger with United Waste
Systems, Inc. ("United") accounted for as a pooling of interests (the "United
Merger") and, accordingly, the accompanying consolidated financial statements
include the accounts and operations of United for all periods presented. Under
the terms of the United Merger, the Company issued 1.075 shares of its common
stock for each outstanding share of United common stock. Additionally, at the
effective date of the United Merger, United stock options, whether or not such
stock options had vested or had become exercisable, were canceled in exchange
for shares of the Company's common stock equal in market value to the fair value
of such United stock options, as determined by an independent third party. The
United Merger increased the Company's outstanding shares of common stock by
approximately 51,900,000 shares, which includes approximately 1,900,000 shares
exchanged for the United stock options. In the third quarter of 1997, the
Company incurred approximately $89,152,000 in merger costs associated with the
United Merger. Of this amount, $17,566,000 related to transaction costs,
$26,198,000 for severance and other termination benefits, $21,629,000 for
integration of operations, and $23,759,000 for the disposal of duplicate
facilities and impaired assets as a result of the United Merger. The results of
operations for United prior to consummation of the United Merger for the
restated periods are as follows (in thousands):

On August 30, 1996, the Company consummated a merger with Sanifill, Inc.
("Sanifill") accounted for as a pooling of interests (the "Sanifill Merger")
and, accordingly, the accompanying consolidated financial statements include the
accounts and operations of Sanifill for all periods presented. Under the terms
of the Sanifill Merger, the Company issued 1.70 shares of its common stock for
each share of Sanifill outstanding common stock. The Sanifill Merger increased
the Company's outstanding shares of common stock by approximately 43,414,000
shares and the Company assumed Sanifill's options and warrants equivalent to
approximately 4,361,000 underlying shares of the Company's common stock. In the
third quarter of 1996, the Company incurred approximately $80,000,000 in merger
costs associated with the Sanifill Merger. The $80,000,000 of merger costs
includes $9,500,000 of transaction costs, $20,000,000 of relocation, severance,
and other termination benefits, $13,000,000 relating to integrating operations,
and $37,500,000 relating to the disposal of duplicate facilities. The results of
operations for Sanifill prior to consummation of the Sanifill Merger for the
restated periods are as follows (in thousands):

On May 7, 1996, the Company consummated a merger with Western Waste
Industries ("Western") accounted for as a pooling of interests (the "Western
Merger") and, accordingly, the accompanying consolidated financial statements
include the accounts and operations of Western for all periods presented. Under
the terms of the Western Merger, the Company issued 1.50 shares of its common
stock for each share of Western outstanding common stock. Prior to the Western
Merger, the Company owned approximately 4.1% of Western's outstanding shares
(634,900 common shares), which were canceled on the effective date of the
Western Merger. The Western Merger increased the Company's outstanding shares of
common stock by

68

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately 22,028,000 shares and the Company assumed options under Western's
stock option plans equivalent to approximately 5,200,000 underlying Company
shares of common stock. In the second quarter of 1996, the Company incurred
approximately $35,000,000 in merger costs associated with the Western Merger and
approximately $4,800,000 in benefits related to Western's pre-merger retirement
program. The $35,000,000 of merger costs include $6,800,000 of transaction
costs, $15,000,000 of severance and other termination benefits, and $13,200,000
of costs related to integrating operations. The results of operations for
Western prior to consummation of the Western Merger for the restated periods are
as follows (in thousands):

1998 and 1997 Purchase Acquisitions and Acquisitions of Minority Interests

On November 30, 1998, the Company acquired the 49% interest of Waste
Management International plc's ("WMI plc") United Kingdom operations that was
previously owned by Wessex Water Plc for 205 million pounds, which is equivalent
to $342,000,000.

On November 3, 1998, the Company acquired the publicly owned shares of its
subsidiary, WMI plc. Under the agreement, the Company paid approximately
$443,000,000 in the aggregate, to the holders of the approximately 20% of the
outstanding shares of WMI plc not previously owned by WM Holdings and its
subsidiaries. The Company liquidated WMI plc after the acquisition in an effort
to simplify the corporate structure and provide enhanced tax planning
opportunities.

On June 18, 1998, the Company acquired the solid waste businesses of
American Waste Systems, Inc. for approximately $150,000,000 in cash. The
businesses acquired include three landfills and one collection operation located
in Ohio.

On March 31, 1998, the Company acquired the remaining outstanding shares of
Wheelabrator Technologies Inc. ("WTI"), which it did not already own for
$876,200,000 in cash.

On January 14, 1998, the Company acquired the solid waste divisions of City
Management Holdings Trust ("City Management") for approximately $810,000,000
consisting primarily of cash and assumed debt. The businesses acquired include
20 collection operations, ten landfills, and 12 transfer stations, located
primarily in Michigan.

On April 1, 1997, the Company acquired substantially all of the assets of
Mid-American Waste Systems, Inc. for approximately $201,000,000, consisting
primarily of cash and assumed debt. The assets acquired include 11 collection
operations, 11 landfills, six transfer stations, and three recycling operations.

On March 12, 1997, the Company acquired substantially all of the Canadian
solid waste subsidiaries of Allied Waste Industries, Inc. for approximately
$518,000,000 in cash. Those businesses represented 41 collection operations,
seven landfills, and eight transfer stations in Alberta, British Columbia,
Manitoba, Ontario, Quebec, and Saskatchewan.

In addition to the above purchase acquisitions, the Company consummated
numerous other acquisitions that were accounted for under the purchase method of
accounting. Results of operations of companies that were acquired and subject to
purchase accounting are included from the dates of such acquisitions.

The total cost of acquisitions accounted for under the purchase method of
accounting, excluding the purchases of minority interests, was approximately
$2,452,690,000 and $2,150,975,000 in 1998 and 1997, respectively.

69

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The pro forma information set forth below assumes acquisitions in 1998 and
1997 accounted for as purchases had occurred at the beginning of 1997. The pro
forma information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would have
been achieved had the acquisitions been consummated at that time (in thousands,
except per share amounts):

Depreciation and amortization expense for property and equipment was
$1,314,568,000, $1,242,061,000 and $1,102,260,000 for 1998, 1997, and 1996,
respectively.

Effective October 1, 1997, the Board of Directors of WM Holdings approved a
revision to WM Holdings' North American collection fleet management policy.
Under the revised policy, WM Holdings replaced front-end loaders after eight
years, and rear-end loaders and roll-off trucks after ten years. The previous
policy was to not replace front-end loaders before they were a minimum of ten
years old and other heavy collection vehicles before they were a minimum of 12
years old. As a result of this decision, the Company recognized an impairment
writedown of $70,900,000 in the fourth quarter of 1997 for those vehicles
scheduled for replacement in the next two years under the new policy.
Depreciable lives were adjusted for the WM Holdings fleet commencing in the
fourth quarter of 1997 to reflect the new policy. Also effective October 1,
1997, WM Holdings reduced depreciable lives on containers from 15 and 20 years
to 12 years, and ceased assigning salvage value in computing depreciation on
North American collection vehicles or containers. These changes in estimates
resulted in an increase in depreciation expense of $33,700,000 in the fourth
quarter of 1997. Upon consummation of the WM Holdings Merger, WM Holdings'
replacement policies were conformed with that of the Company, which are
materially consistent with the revised WM Holdings policy stated above.

70

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Also effective October 1, 1997, WM Holdings changed its process of
evaluating the probability that landfill airspace from expansions will be
permitted. This change in estimate decreased the useful lives of certain WM
Holdings landfills and increased depreciation and amortization and the provision
for final closure and post-closure by $15,800,000 in the fourth quarter of 1997.

Upon consummation of the WM Holdings Merger, the Company entered into a
$3,000,000,000 syndicated loan facility (the "Syndicated Facility") which was in
addition to the Company's existing $2,000,000,000 senior revolving credit
facility (the "Credit Facility"). The Syndicated Facility requires annual
renewal by the lender and provides for a one-year term option at the Company's
request in the event of non-renewal. The Syndicated Facility is available for
borrowings, including up to $800,000,000 of standby letters of credit and to
support the issuance of commercial paper; accordingly, commercial paper has been
classified as non-current for financial reporting purposes. The applicable
interest rate and facility fee for the Syndicated Facility are similar to those
contained in the Company's then existing Credit Facility (which was amended to

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WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

provide for the WM Holdings Merger). The covenant restrictions for the
Syndicated Facility and Credit Facility include, among others, interest coverage
and debt capitalization ratios, and limitations on dividends, additional
indebtedness, liens, and asset sales. The Syndicated Facility and Credit
Facility are used to refinance existing bank loans and letters of credit, to
fund acquisitions, and for working capital purposes. At December 31, 1997, the
committed capacity under the Credit Facility was $2,000,000,000, including
standby letters of credit of up to $650,000,000. At December 31, 1997, the
applicable interest rate was 6.1% per annum and the facility fee was 0.1125% per
annum, with the Company having borrowed $430,000,000 and issued letters of
credit of $467,029,000 under the Credit Facility. Principal reductions are not
required during the five-year term of the Credit Facility, which was entered
into on August 7, 1997. At December 31, 1998, the applicable interest rate on
the syndicated Facility was 5.46% and there were no borrowings outstanding under
the Credit Facility. The facility fee was 0.10% and 0.125% per annum, under the
Syndicated Facility and Credit Facility, respectively, at December 31, 1998. The
Company had borrowed $1,545,000,000 and had issued letters of credit of
$1,253,361,000 under the Syndicated Facility and Credit Facility at December 31,
1998.

In November 1998, the Company entered into two multi-currency credit
facilities totaling EURO 300,000,000, with a syndicate of banks. The facilities
provide for borrowings in several currencies and are renewable annually. The
outstanding balance as of December 31, 1998 was EURO 228,176,000 (equivalent to
$267,400,000). The applicable interest rate is determined by LIBOR or PIBOR plus
margin and mandatory costs as defined per the agreement. The interest rates on
the two outstanding loans at December 31, 1998, were 7.03% and 3.87%.

On July 17, 1998, the Company issued $600,000,000 of 7% senior notes, due
on July 15, 2028 (the "7% Notes") and $600,000,000 of 6 1/8% mandatorily
tendered senior notes, due on July 15, 2011 (the "6 1/8% Notes"). The 7% Notes
are redeemable, in whole or in part, at the option of the Company at any time
and from time to time at the redemption price, as defined in the indenture. The
6 1/8% Notes are subject to certain mandatory tender features as described in
the indenture, which may require the purchase by the Company of a portion of or
all of the outstanding notes on July 15, 2001. The proceeds from the 7% Notes
and 6 1/8% Notes were used to repay outstanding indebtedness under the Company's
bank borrowings. Interest on the 7% Notes and 6 1/8% Notes is payable
semi-annually on January 15 and July 15.

In May 1998, the Company retired approximately $40,000,000 of certain debt
with an average interest rate of 9.0% with proceeds from the Credit Facility. In
connection with this debt retirement, the Company incurred prepayment penalties
and other fees of $1,811,000 and wrote off the remaining unamortized discounts
and debt offering costs of $4,689,000, which were recorded as an extraordinary
item.

On December 17, 1997, the Company issued $350,000,000 of 6 1/2% senior
notes due December 15, 2002, and $150,000,000 of 7 1/8% senior notes due
December 15, 2017. The senior notes constitute senior and unsecured obligations
of the Company ranking equal in right of payment with all other senior and
unsecured obligations of the Company, as defined in the indenture. The 6 1/2%
senior notes due December 15, 2002, are not redeemable. The $150,000,000 of
7 1/8% senior notes due December 15, 2017, are redeemable, in whole or in part,
at the option of the Company at any time and from time to time at a redemption
price defined in the indenture. Interest is payable semi-annually on December 15
and June 15. The proceeds were used to repay debt under the Company's bank
borrowings.

On September 12, 1997, the Company issued $300,000,000 of 7% senior notes
due October 1, 2004, and $300,000,000 of 7 1/8% senior notes due October 1,
2007. The senior notes constitute senior and unsecured obligations of the
Company, ranking equal in right of payment with all other senior and unsecured
obligations of the Company, as defined in the indenture. The senior notes are
redeemable at the option of the Company at any time and from time to time at the
principal amount of such notes, plus accrued interest. Interest is payable
semi-annually on October 1 and April 1. The proceeds were used to repay debt
under the Company's bank borrowings.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During August 1997 and September 1997, the Company prepaid the holders of
certain privately placed senior note an aggregate amount of $182,500,000 with
proceeds from its Credit Facility. Interest on these privately placed senior
notes ranged from 7.29% to 8.44%. In connection with this transaction, the
Company was required to pay prepayment penalties of $7,975,000 and wrote off the
remaining unamortized deferred offering costs of approximately $1,311,000, which
was recorded as an extraordinary item in the third quarter of 1997.

On February 7, 1997, the Company issued $535,275,000 of 4% convertible
subordinated notes, due on February 1, 2002. Interest is payable semi-annually
in February and August. The notes are convertible by the holders into shares of
the Company's common stock at any time at a conversion price of $43.56 per
share. The notes are subordinated in right of payment to all existing and future
senior indebtedness, as defined in the indenture. The notes are redeemable after
February 1, 2000 at the option of the Company at 101.6% of the principal amount,
declining to 100.8% of the principal amount on February 1, 2001 and thereafter
until maturity, at which time the notes will be redeemed at par, plus accrued
interest. The proceeds were primarily used to repay debt under the Company's
bank borrowings, to fund acquisitions, and for general corporate purposes.

On June 5, 1996, United issued $150,000,000 of 4 1/2% convertible
subordinated notes, due June 1, 2001. Interest is payable semi-annually in June
and December. The notes are convertible into shares of the Company's common
stock at a conversion price of $30.23 per share. The notes are subordinated in
right of payment to all existing and future senior indebtedness, as defined in
the indenture. The notes are redeemable after June 1, 1999, at the option of the
Company at 101.8% of the principal amount, declining annually to par on June 1,
2001, plus accrued interest.

On March 4, 1996, Sanifill issued $115,000,000 of 5% convertible
subordinated debentures, due on March 1, 2006. Interest is payable semi-annually
in March and September. The debentures are convertible into shares of the
Company's common stock at a conversion price of $28.31 per share. The debentures
are subordinated in right of payment to all existing and future senior
indebtedness, as defined in the indenture. In March 1999, these debentures were
called by the Company and subsequently converted into equity by the debenture
holders. See Note 20.

The 5.75% convertible subordinated notes due 2005 are subordinated to all
existing and future senior indebtedness of the Company. Each note bears cash
interest at the rate of two percent per annum of the $1,000 principal amount at
maturity, payable semi-annually. The difference between the principal amount at
maturity of $1,000 and the $717.80 stated issue price of each note represents
the stated discount. At the option of the holder, each note can be purchased for
cash by the Company on March 15, 2000, at $843.03. Accrued unpaid interest to
those dates will also be paid. The notes will be callable by the Company on and
after March 15, 2000, for cash, at the stated issue price plus accrued stated
discount and accrued but unpaid interest through the date of redemption. In
addition, each note is convertible at any time prior to maturity into
approximately 18.9 shares of the Company's common stock, subject to adjustment
upon the occurrence of certain events. Upon any such conversion, the Company
will have the option of paying cash equal to the market value of the shares
which would otherwise be issuable.

6. ENVIRONMENTAL LIABILITIES

The Company has material financial commitments for the costs associated
with its future obligations for final closure, which is the closure of the final
cell of a landfill or the regulatory required costs associated with existing
operations at a hazardous waste treatment, storage or disposal facility which
are subject to Toxic Substances Central Act ("TSCA") or Subtitle D of the
Resource Conservation and Recovery Act ("RCRA") hazardous waste treatment,
storage, or disposal facility, and post-closure of those facilities. For
landfills, the final closure and post-closure liabilities are accrued and
charged to expense as airspace is consumed such that the total estimated final
closure and post-closure cost will be fully accrued for each

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landfill at the time the site discontinues accepting waste and is closed.
Estimates for final closure and post-closure costs are developed using input
from the Company's engineers and accountants and are reviewed by management
(typically not less than once per year). The estimates are based on the
Company's interpretation of current requirements and proposed regulatory
changes. In the U.S., the final closure and post-closure requirements are
established under the standards of the U.S. Environmental Protection Agency's
Subtitle C and D regulations, as implemented and applied on a state-by-state
basis. Such costs may increase in the future as a result of legislation or
regulation. Final closure and post-closure accruals consider estimates for the
final cap and cover for the site, methane gas control, leachate management and
groundwater monitoring, and other operational and maintenance costs to be
incurred after the site discontinues accepting waste, which is generally
expected to be for a period of up to thirty years after final site closure. For
purchased disposal sites, the Company assesses and records a final closure and
post-closure liability at the time the Company assumes closure responsibility
based upon the estimated final closure and post-closure costs and the percentage
of airspace utilized as of such date. Thereafter, the difference between the
final closure and post-closure costs accrued and the total estimated closure and
post-closure costs to be incurred is accrued and charged to expense as airspace
is consumed. Such costs for foreign landfills are estimated based on compliance
with local laws, regulations and customs. For other facilities, final closure
and post-closure costs are determined in consideration of regulatory
requirements.

The Company has also established procedures to evaluate its potential
remedial liabilities at closed sites which it owns or operates, or to which it
transported waste, including 88 sites listed on the Superfund National
Priorities List ("NPL") as of December 31, 1998. The majority of situations
involving NPL sites relate to allegations that subsidiaries of the Company (or
their predecessors) transported waste to the facilities in question, often prior
to the acquisition of such subsidiaries by the Company. The Company routinely
reviews and evaluates sites that require remediation, including NPL sites,
giving consideration to the nature (e.g., owner, operator, transporter, or
generator), and the extent (e.g., amount and nature of waste hauled to the
location, number of years of site operation by the Company, or other relevant
factors) of the Company's alleged connection with the site, the accuracy and
strength of evidence connecting the Company to the location, the number,
connection and financial ability of other named and unnamed potentially
responsible parties ("PRPs"), and the nature and estimated cost of the likely
remedy. Cost estimates are based on management's judgment and experience in
remediating such sites for the Company as well as for unrelated parties,
information available from regulatory agencies as to costs of remediation, and
the number, financial resources and relative degree of responsibility of other
PRPs who are jointly and severally liable for remediation of a specific site, as
well as the typical allocation of costs among PRPs. These estimates are
sometimes a range of possible outcomes. In such cases, the Company provides for
the amount within the range which constitutes its best estimate. If no amount
within the range appears to be a better estimate than any other amount, then the
Company provides for the minimum amount within the range in accordance with the
SFAS No. 5. The Company believes that it is "reasonably possible," as that term
is defined in SFAS No. 5 ("more than remote but less than likely"), that its
potential liability, at the high end of such ranges, would be approximately
$233,000,000 higher on a discounted basis in the aggregate than the estimate
that has been recorded in the consolidated financial statements as of December
31, 1998.

Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate cost of remediation
require a number of assumptions and are inherently difficult, and the ultimate
outcome may differ from current estimates. However, the Company believes that
its extensive experience in the environmental services business, as well as its
involvement with a large number of sites, provides a reasonable basis for
estimating its aggregate liability. As additional information becomes available,
estimates are adjusted as necessary. While the Company does not anticipate that
any such adjustment would be material to its consolidated financial statements,
it is reasonably possible that technological, regulatory or enforcement
developments, the results of environmental studies, the existence and ability of
other PRPs to

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WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

contribute to the settlements of such liabilities, or other factors could
necessitate the recording of additional liabilities which could be material.

Where the Company believes that both the amount of a particular
environmental liability and the timing of the payments are reliably
determinable, the cost in current dollars is inflated at 2% (3% at December 31,
1997) until expected time of payment and then discounted to present value at
5.5% (6% at December 31, 1997). The portion of the Company's recorded
environmental liabilities that is not inflated or discounted was approximately
$492,339,000 and $344,700,000 at December 31, 1998 and 1997, respectively. Had
the Company not discounted any portion of its liability, the amount recorded
would have been increased by approximately $308,262,000 at December 31, 1998.

The Company's liabilities for final closure, post-closure monitoring and
environmental remediation costs were as follows (in thousands):

In addition to the amounts above, at a certain site, the Company has
perpetual care obligations aggregating approximately $1,527,000 per year.

From time to time, the Company and certain of its subsidiaries are named as
defendants in personal injury and property damage lawsuits, including purported
class actions, on the basis of a Company subsidiary having allegedly owned,
operated or transported waste to a disposal facility which is alleged to have
contaminated the environment or, in certain cases, conducted environmental
remediation activities at such sites. While the Company believes it has
meritorious defenses to these lawsuits, their ultimate resolution is often
substantially uncertain due to a number of factors, and it is possible such
matters could have a material adverse impact on the Company's earnings for one
or more quarters or years.

The Company has filed suit against numerous insurance carriers seeking
reimbursement for past and future remedial, defense and tort claim costs at a
number of sites. Carriers involved in these matters have typically denied
coverage and are defending against the Company's claims. While the Company is
vigorously

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WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

pursuing such claims, it regularly considers settlement opportunities when
appropriate terms are offered. Settlements to date ($46,600,000 in 1998,
$94,300,000 in 1997, and $60,300,000 in 1996) have been included in operating
costs and expenses as an offset to environmental expenses.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value amounts have been determined by the Company using
available market information and commonly accepted valuation methodologies.
However, considerable judgement is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company or holders of the
instruments could realize in a current market exchange. The use of different
assumptions and/or estimation methodologies may have a material effect on the
estimated fair values. The fair value estimates presented herein are based on
information available to management as of December 31, 1998 and 1997. Such
amounts have not been revalued since those dates, and current estimates of fair
value may differ significantly from the amounts presented herein.

The carrying values of cash and cash equivalents, short-term investments,
restricted funds held by trustees, trade accounts receivable, trade accounts
payable, financial instruments included in notes and other receivables,
financial instruments included in other assets, and derivative financial
instruments approximate their fair values principally because of the short-term
maturities of these instruments.

The fair values of the Company's outstanding indebtedness is as follows (in
thousands):

Interest rate agreements -- The Company and its subsidiaries have entered
into interest rate swap agreements to balance fixed and floating rate debt in
accordance with management's criteria. The agreements are contracts to exchange
fixed and floating interest rate payments periodically over a specified term
without the exchange of the underlying notional amounts. The agreements provide
only for the exchange of interest on the notional amounts at the stated rates,
with no multipliers or leverage. Differences paid or received are accrued in the
consolidated financial statements as a part of interest expense on the
underlying debt over the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

life of the agreements and the swap is not recorded on the balance sheet. As of
December 31, 1998, interest rate agreements in notional amounts and with terms
as set forth in the following table were outstanding:

NOTIONAL
CURRENCY AMOUNT RECEIVE PAY DURATION OF AGREEMENTS
-------- ----------- -------- -------- ----------------------
U.S. Dollar................ 50,000,000 Floating Fixed June 1997 to June 1999
U.S. Dollar................ 24,000,000 Floating Fixed November 1994 to September 1999
U.S. Dollar................ 15,000,000 Floating Fixed November 1996 to November 1999
Dutch Guilder.............. 115,000,000 Floating Fixed November 1996 to January 2000
German Deutschemark........ 150,000,000 Floating Fixed March 1996 to January 2000
French Franc............... 200,000,000 Fixed Floating December 1998 to December 2002
U.S. Dollar................ 33,750,000 Floating Fixed January 1998 to January 2003
U.S. Dollar................ 23,772,000 Floating Fixed April 1997 to April 2012

Currency agreements -- From time to time, the Company and certain of its
subsidiaries use foreign currency derivatives to seek to mitigate the impact of
translation on foreign earnings and income from foreign investees. Typically
these have taken the form of purchased put options or collars. The Company
receives or pays, based on the notional amount of the option, the difference
between the average exchange rate of the hedged currency against the base
currency and the average (strike price) contained in the option. Complex
instruments involving multipliers or leverage are not used. Although the purpose
for using such derivatives is to mitigate currency risk, they do not qualify for
hedge accounting under generally accepted accounting principles and,
accordingly, must be adjusted to market value at the end of each accounting
period with gains or losses included in other income. There were no currency
derivatives of this type outstanding at December 31, 1998. From time to time,
the Company also uses foreign currency forward contracts to hedge committed
transactions when the terms of such a transaction are known and there is a high
probability that the transaction will occur.

Commodity agreements -- Prior to the WM Holdings Merger, WM Holdings
utilized derivatives to seek to mitigate the impact of fluctuations in the price
of fuel used by its vehicles. Quantities hedged did not exceed anticipated fuel
purchases in any period. Gains or losses were recognized in operating expenses,
as cost of fuel purchases, when paid or received. The primary instruments used
were collars, swaps and swaptions. Collars consist of the purchase of call
options along with a corresponding sale of put options at a lower price, with
the effect of establishing a "cap" and a "floor" with respect to the price of
specified quantities of fuel. A swap is an agreement with a counterparty whereby
WM Holdings would pay a fixed price and would receive a floating price for
specified quantities during a given period. In a swaption, WM Holdings would be
paid a premium by the counterparty for the right, but not the obligation, at the
end of the option period (usually 90 to 180 days) to enter into a swap with
respect to a specified quantity in a given period in the future. All such
derivatives were terminated following the WM Holdings Merger, and no fuel
hedging transactions were outstanding at December 31, 1998.

9. CAPITAL STOCK

The Board of Directors is authorized to issue preferred stock in series,
and with respect to each series, to fix its designation, relative rights
(including voting, dividend, conversion, sinking fund, and redemption rights),
preferences (including dividends and liquidation), and limitations. The Company
currently has no issued or outstanding preferred stock.

In June 1998, Eastern completed the registration and sale of 8,625,000
shares of its common stock at $26.375 per share (equivalent to 5,525,175 shares
of the Company's common stock at $41.17 per share). This public offering
included the sale of 500,000 shares of Eastern common stock by selling
shareholders (equivalent to 320,300 shares of the Company's common stock). The
net proceeds after deducting fees and

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WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

related costs, were approximately $205,000,000 and were primarily used to repay
debt under Eastern's credit facility and for general corporate purposes.

As a condition to completing the WM Holdings Merger, during June 1998, WM
Holdings sold 20,000,000 shares of its common stock from its treasury
(equivalent to 14,500,000 shares of the Company's common stock) in an offering
to the public. The net proceeds of approximately $607,000,000 were used by WM
Holdings to retire outstanding debt under its credit facilities.

In June 1997, prior to the WM Holdings Merger, the Company acquired a
majority of the Canadian solid waste businesses of WM Holdings in a purchase
business combination for consideration that included 1,705,757 shares of the
Company's common stock. WM Holdings sold its shares of the Company's common
stock on the open market during December 1997 for approximately $65,000,000.
Because the WM Holdings Merger was accounted for as a pooling of interests, WM
Holdings' sale of its shares of the Company's common stock is treated as an
equity offering to the public for financial accounting and reporting purposes.

On March 3, 1997, prior to its becoming a wholly-owned subsidiary of the
Company, United completed a public offering in which it issued 3,450,000 shares
of its common stock, priced at $36.50 per share (equivalent to 3,708,750 shares
of the Company's common stock, priced at $33.95 per share). The net proceeds of
approximately $119,000,000 were used to repay debt under United's credit
facility, to fund acquisitions, and for general corporate purposes.

On February 7, 1997, the Company completed a public offering of 11,500,000
shares of its common stock, priced at $35.125 per share. The net proceeds of
approximately $387,438,000 were primarily used to repay bank borrowing.

In February 1997, the board of directors of WM Holdings authorized the
repurchase of up to 50,000,000 shares of its own common stock (equivalent to
36,250,000 shares of the Company's common stock) in the open market, in
privately negotiated transactions, or through issuer tender offers. WM Holdings
repurchased 30,000,000 shares of its own common stock (equivalent to 21,750,000
shares of the Company's common stock) through a "Dutch auction" tender offer in
the second quarter of 1997.

During 1994 through 1996, WM Holdings sold put options on 42,300,000 shares
of its common stock (equivalent to 30,700,000 shares of the Company's common
stock). The put options gave the holders the right at maturity to require WM
Holdings to repurchase shares of its common stock at specified prices. Proceeds
from the sale of put options were credited to additional paid-in capital. The
amount WM Holdings would be obligated to pay to repurchase shares of its common
stock if all outstanding put options were exercised was reclassified to a
temporary equity account. In the event the options were exercised, WM Holdings
had the right to pay the holder in cash the difference between the strike price
and the market price of WM Holdings' shares, in lieu of repurchasing the stock.
Options on 32,500,000 shares expired unexercised, as the price of WM Holdings'
stock was in excess of the strike price at maturity. WM Holdings repurchased
3,100,000 shares of its common stock at a cost of $107,500,000, and 6,700,000
options were settled for cash of $13,600,000. There were no put options
outstanding at and subsequent to December 31, 1997.

As of December 31, 1998, the Company is limited in its ability to pay
dividends pursuant to its current credit agreements of amounts not to exceed
$100,000,000 per year. The Company declared cash dividends of approximately
$93,810,000, $309,577,000, and $308,265,000, to its shareholders during 1998,
1997, and 1996, respectively. Based on the Company's weighted average common
shares outstanding, the cash dividends per common share are $0.16, $0.56, and
$0.57 for the years ended December 31, 1998, 1997, and 1996, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. COMMON STOCK OPTIONS AND WARRANTS

In accordance with the Company's 1990 Stock Option Plan (the "1990 Plan"),
options to purchase 900,000 shares of the Company's common stock may be granted
to officers, directors, and key employees. In accordance with the Company's 1993
Stock Option Incentive Plan, as amended (the "1993 Plan"), options to purchase
26,500,000 shares of the Company's common stock may be granted to officers,
directors, and key employees. Options are granted under both the 1990 Plan and
the 1993 Plan at an exercise price which equals or exceeds the fair market value
of the common stock on the date of grant, with various vesting periods, and
expire up to ten years from the date of grant. No options are available for
future grant under the 1990 Plan.

Under the Company's 1996 Stock Option Plan for Non-Employee Directors
("1996 Directors Plan"), its directors who are not officers, full-time
employees, or consultants of the Company receive an annual grant of 12,500
options on each January 1 (amended to 10,000 options effective January 1, 1999).
In accordance with the 1996 Directors Plan, options to purchase up to 1,400,000
shares of the Company's common stock may be granted, with five year vesting
periods (amended to one year effective January 1, 1999), and expiration dates
ten years from the date of grant. Options may be granted at an exercise price
which equals fair market value of the common stock on the date of grant.

In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123").
SFAS No. 123 prescribes a fair value based method of determining compensation
expense related to stock-based awards granted to employees. The recognition
provisions of SFAS No. 123 are optional; however, entities electing not to adopt
the recognition provisions of SFAS No. 123 are required to make disclosures of
pro forma net income and earnings per share as if the recognition provisions of
SFAS No. 123 had been applied, as well as disclosures regarding assumptions
utilized in determining the pro forma amounts. The Company did not adopt the
recognition provisions of SFAS No. 123, however, the required disclosures are
included below.

Stock options granted by the Company in 1998, 1997, and 1996 have ten year
terms. Stock options granted by Eastern and Western became fully vested upon
consummation of the respective mergers. Stock options granted by Sanifill
continue to vest under varying vesting periods ranging from immediate vesting to
five years following the date of grant. At the effective date of the United
Merger, United stock options, whether or not such stock options had vested or
had become exercisable, were canceled in exchange for shares of the Company's
common stock equal in market value to the fair value of such United stock
options, as determined by an independent third party. Stock options granted by
WM Holdings prior to March 10, 1998, became fully vested upon consummation of
the WM Holdings Merger, and certain of those include put provision benefits for
up to a one year period from the date of the WM Holdings Merger (See Note 14).
WM Holdings options granted after March 10, 1998, continue to vest in accordance
with their original vesting schedule of 3 years.

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WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes common stock option and warrant transactions
under the aforementioned plans and various predecessor plans for 1998, 1997, and
1996:

The common stock options and warrants outstanding at December 31, 1998,
include approximately 21,247,000, common stock options and warrants granted by
Western, Sanifill, United, WM Holdings, and Eastern, of which approximately
17,470,000 are exercisable.

The weighted average fair value of common stock options and warrants
granted during 1998, 1997 and 1996 were $18.61, $11.92 and $9.59, respectively.
The fair value of each common stock option or warrant granted to employees or
directors by the Company during 1998, 1997 and 1996 is estimated utilizing the
Black-Scholes option-pricing model. The following weighted average assumptions
were used: dividend yield of 0% to 2%, risk-free interest rates which vary for
each grant and range from 5.06% to 7.67%, expected life of three to seven years
for all grants, and stock price volatility primarily ranging from 25.2% to 31.3%
for all grants.

Outstanding and exercisable stock options and warrants at December 31,
1998, were as follows (in thousands):

If the Company applied the recognition provisions of SFAS No. 123, the
Company's net income (loss) and earnings (loss) per common share for 1998, 1997,
and 1996 would approximate the pro forma amounts shown below (in thousands,
except per share amounts):

The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts.

Beginning in 1996, WM Holdings made grants of restricted stock.
Compensation expense for grants of restricted shares was recognized ratably over
the vesting period (generally five to ten years) and amounted to approximately
$759,000 in 1998 through the date of the WM Holdings Merger, and $2,400,000 and
$100,000 in 1997 and 1996, respectively. The unamortized restricted stock of
$9,209,000 vested upon consummation of the WM Holdings Merger, and accordingly
was included in merger costs in 1998.

In September 1998, two senior executives were granted an aggregate of
1,700,000 shares under the 1993 Plan. The options granted vest according to
certain performance goals in lieu of the normal vesting schedules. All such
options fully vest no later than eight years from the date of grant.

11. EMPLOYEE BENEFIT PLANS

Principally through the USA Waste Services, Inc. Employee's Savings Plan,
the Waste Management Retirement Savings Plan, and the Wheelabrator-Rust Savings
and Retirement Plan, the Company has established qualified defined contribution
retirement plans covering substantially all domestic employees other than those
employees who are covered under collective bargaining agreements which do not
provide for coverage under the plans. In previous years, certain of the plans
provided for annual contributions by the Company as determined by their
respective boards of directors. In 1998, the primary feature of plans covering
the majority of participants was the Company match of employee contributions of
amounts as specified in the applicable plan.

Effective January 1, 1999, the Waste Management Retirement Savings Plan and
the Wheelabrator-Rust Savings and Retirement Plan were merged into the USA Waste
Services, Inc. Employee's Savings Plan, which was then renamed the Waste
Management Retirement Savings Plan ("Savings Plan"). The Savings Plan covers
employees (except those working subject to a collective bargaining agreement
which do not provide for coverage under the plans) following a 90 day waiting
period after hire, and allows eligible employees to contribute up to 15% of
their annual compensation, as limited by IRS regulations. Under the Savings
Plan, the Company matches employee contributions up to 3% of their eligible
compensation, and matches 50% of employee contributions in excess of 3% but less
than 6% of eligible compensation. Both employee and Company contributions vest
immediately. Charges to operations for these plans were $69,721,000, $42,335,000
and $29,648,000 during 1998, 1997 and 1996, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Certain of the Company's foreign subsidiaries participate in both defined
benefit and defined contribution retirement plans for its employees in those
countries. The projected benefit obligation, plan assets and unfunded liability
of the defined benefit plans are not material. In addition to the pension plan
for certain employees under collective bargaining agreements established at the
end of 1998 (see below), other Company subsidiaries participate in various
multi-employer pension plans covering certain employees not covered under the
Company's pension plan. These multi-employer plans are generally defined benefit
plans; however, in many cases, specific benefit levels are not negotiated with
or known by the employer contributors. Contributions of $25,800,000, $18,600,000
and $16,500,000 for subsidiaries' defined benefit plans were made and charged to
income in 1998, 1997 and 1996, respectively.

The Company had a qualified defined benefit pension plan for all eligible
non-union domestic employees of WM Holdings which, as discussed below, was
terminated as of December 31, 1998 in conjunction with the WM Holdings Merger.
Throughout the life of the plan, benefits were based on the employee's years of
service and compensation during the highest five consecutive years out of the
last ten years of employment. The Company's funding policy was to contribute
annually an amount determined in consultation with its actuaries, approximately
equal to pension expense, except as may be limited by the requirements of the
Employee Retirement Income Security Act ("ERISA"). An actuarial valuation report
was prepared for the plan as of September 30 each year and used, as permitted by
the FASB's Statement of Financial Accounting Standards No. 87, Employers
Accounting for Pensions ("SFAS No. 87"), for the year-end disclosures.

In conjunction with the WM Holdings Merger, the Company decided to
terminate the defined benefit pension plan as of December 31, 1998, and
liquidate the plan's assets and settle its obligations to participants in 1999,
except as related to certain employees participating under collective bargaining
agreements, whose benefits were transferred to a newly created plan effective
October 1, 1998. As required under the FASB's Statement of Financial Accounting
Standard No. 88, Employer's Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, this decision has
resulted in a curtailment expense charge in unusual items of $34,716,000 in
1998, and is currently estimated to result in an approximate net cash settlement
charge in unusual items in 1999 of $125,000,000. To the extent that this
termination benefit has not yet been charged to expense and funded, additional
minimum pension liability has been recorded as a charge to other comprehensive
income. The Company expects to record this amount in 1999, at which time it will
result in an adjustment to other comprehensive income. The amount of the 1999
settlement is inversely sensitive to changing interest rates. This sensitivity
is approximately $20,000,000 for every 25 basis point fluctuation in interest
rates.

Also in conjunction with the WM Holdings Merger, the Company has terminated
certain non-qualified supplemental benefit plans for certain officers and
non-officer managers, the most significant plan being the Supplemental Executive
Retirement Plan (collectively the "Supplemental Plans"). The curtailment and
settlement loss related to these plans of $61,987,000 was recorded in unusual
items in 1998. A substantial portion of these benefits was paid to participants
by December 31, 1998, and unpaid amounts are accrued at December 31, 1998.

WM Holdings and certain of its subsidiaries provided post-retirement health
care and other benefits to eligible employees. In conjunction with the WM
Holdings Merger, the Company has decided to limit participation in these plans
to participating retired employees as of December 31, 1998.

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The following tables provide a reconciliation of the changes in the plans'
benefit obligations and the fair value of assets over the two-year period ending
December 31, 1998, and a statement of the funded status as of December 31 of
both years (in thousands):

The principal element of the Other Benefits referred to above is the
post-retirement health care plan. Participants in the WM Holdings plan
contribute to the cost of the benefit, and for retirees since January 1, 1992,
the Company's contribution is capped at between $0 and $600 per month per
retiree, based on years of service. For measurement purposes, a 7.1% annual rate
of increase in the per capita cost of covered health care claims was assumed for
1998 (being an average of the rate used by all plans); the rate was assumed to
decrease to 6% in 2001 and remain at that level thereafter. A 1% change in
assumed health care cost trend rates would have the following effects (in
thousands):

In 1998, WM Holdings merged the Employee Stock Ownership Plan that was
initially established for eligible WM Holdings' employees in 1988 into its
Retirement Savings Plan. During 1994, WM Holdings established an Employee Stock
Benefit Trust ("Trust") and sold 12,600,000 shares of its treasury stock to the
Trust in return for a 30-year, 7.33% note with interest payable quarterly and
principal due at maturity. WM Holdings has agreed to contribute to the Trust
each quarter funds sufficient, when added to dividends on the shares held by the
Trust, to pay interest on the note as well as principal outstanding at maturity.
At the direction of an administrative committee, the trustee will use the shares
or proceeds from the sale of shares to

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pay employee benefits, and to the extent of such payments by the Trust, the
Company will forgive principal and interest on the note. The shares of common
stock issued to the Trust are not considered to be outstanding in the
computation of earnings per share until the shares are utilized to fund
obligations for which the trust was established. Changes in the market value of
these shares are reflected as adjustments in additional paid-in capital.

12. INCOME TAXES

For financial reporting purposes, income (loss) from continuing operations
before income taxes, showing domestic and international sources, is as follows
(in thousands):

At December 31, 1998, the Company's subsidiaries have approximately
$200,599,000 of federal net operating loss ("NOL") carryforwards, $1,007,749,000
of state NOL carryforwards, and $598,930,000 of foreign NOL carryforwards.
Foreign NOL carryforwards of approximately $535,530,000 may be carried forward
indefinitely; the remaining NOL carryforwards have expiration dates through
2013. The Company's subsidiaries have $16,062,000 of alternative minimum tax
credit carryforwards that may be used indefinitely; state tax credit
carryforwards of $5,039,000; federal investment tax credit carryforwards of
$381,000; and foreign tax credit carryforwards of $32,614,000. Valuation
allowances have been established for uncertainties in realizing the benefit of
tax loss and credit carryforwards. While the Company expects to realize the
deferred tax assets, net of the valuation allowances, changes in estimates of
future taxable income or in tax laws may alter this expectation.

valuation allowance increased approximately $98,792,000 primarily due to the
uncertainty of realizing foreign NOL carryforwards.

The Company does not provide for U.S. income taxes on unremitted earnings
of foreign subsidiaries as it is the present intention of management to reinvest
the unremitted earnings in its foreign operations. Unremitted earnings of
foreign subsidiaries are approximately $498,000,000 at December 31, 1998. It is
not practicable to determine the amount of U.S. income taxes that would be
payable upon remittance of the assets that represent those earnings.

13. SEGMENT AND RELATED INFORMATION

The Company's North American solid waste management operations represents
80.5% of operating revenues, 98.7% of earnings before interest and tax ("EBIT"),
and 77.3% of total assets in 1998, and is the Company's principal reportable
segment under Statement of Financial Accounting Standards No. 131, Disclosure
about Segments of an Enterprise and Related Information ("SFAS No. 131"). This
segment provides integrated waste management services consisting of collection,
transfer, disposal (solid waste landfill, hazardous waste landfill and
waste-to-energy), recycling, and other miscellaneous services to commercial,
industrial, municipal and residential customers in North America. Similar
operations in international markets outside of North America are disclosed as a
separate segment. The Company's other reportable segment consists of non-solid
waste services, aggregated as a single segment for this reporting presentation
as permitted under SFAS No. 131. The non-solid waste segment includes other
hazardous waste services such as chemical waste management services and
low-level and other radioactive waste services, the Company's independent power
projects, and other non-solid waste services to commercial, industrial and
government customers, and includes business lines that are being actively
marketed. No single customer accounted for as much as 10% of consolidated
revenue in any year.

Certain of the services provided by the Company are subject to extensive
and evolving federal, state, and local environmental laws and regulations in the
U.S. and elsewhere that have been enacted in response to technological advances
and the public's increased concern over environmental issues. Refer to Notes 6
and 17 for a further discussion of regulatory issues.

Summarized financial information concerning the Company's reportable
segments for the respective years ended December 31, is shown in the following
table. Prior period information has been restated to conform to the segments
described above, which are based on the structure and internal organization of
the Company as of December 31, 1998 (in thousands):

(b) Non-Solid Waste revenues are net of inter-segment revenue with North
American Solid Waste of $122,400,000, $86,400,000 and $69,100,000 in 1998,
1997 and 1996, respectively. There are no other significant sales between
segments.

(c) For those items included in the determination of EBIT, (the earnings
measurement used by management to evaluate operating performance) the
accounting policies of the segments are generally the same as those
described in the summary of significant accounting policies.

(d) There are no material asymmetrical allocations of EBIT versus assets
between segments or corporate. Certain asset impairments and unusual items
reported in the reconciliation of EBIT to reported net income below,
however, have resulted in adjustments to assets ultimately reflected on
segment balance sheets. Assets are net of inter-segment receivables and
investments.

The reconciliation of total EBIT reported above to net income is as follows
(in thousands):

Foreign operations in 1998 were conducted in seven countries in Europe,
seven countries in the Pacific Rim, Canada, Mexico, Brazil, Israel and
Argentina. Operating revenues and property and equipment (net) relating to the
Company's operations by significant geographic area is as follows (in
thousands):

The Company operates facilities in Hong Kong which are owned by the Hong
Kong government. The Hong Kong economy has been impacted by the economic
uncertainty associated with many of the countries in the region. High and
volatile interest rates have resulted from speculation regarding its currency.
The Company also has operations in Indonesia, Thailand and Brazil. These
countries have experienced illiquidity, volatile currency exchange rates and
interest rates, and reduced economic activity. The Company will be affected for
the foreseeable future by economic conditions in this region, although it is not
possible to determine the extent of such impact. At December 31, 1998, the
Company has $114,749,000 revenue, $41,403,000 property and equipment, net, and
$104,103,000 total investment in the above Asian countries (including Hong
Kong). The Company has a total investment of $38,900,000 in Brazil which is
primarily investments accounted for under the equity method of accounting.
Income from continuing operations before income taxes from Hong Kong was
$21,200,000 in 1998. Income from Indonesia, Thailand and Brazil has not been
significant to date.

14. ASSET IMPAIRMENTS AND UNUSUAL ITEMS

In 1998, 1997, and 1996, the Company recorded certain charges for asset
impairments and unusual items resulting from reviews of business integration and
operating plans. Such reviews were generally performed in connection with the
Company's merger activities. In addition, the 1997 consolidated financial
statements include a significant accounting charge resulting from a
comprehensive review performed by the management of WM Holdings of its
operations and investments in the fourth quarter of 1997. Similarly, the 1996
consolidated financial statements include accounting charges recorded by WM
Holdings for certain operational and management restructuring activities and
assets that had become impaired.

Fair values for asset impairment losses was determined for landfills,
hazardous waste facilities, recycling investments and other facilities,
primarily based on future cash flow projections discounted back using discount
rates appropriate for the risks involved with the specific assets. For surplus
real estate, market opinions and appraisals were used. In determining fair
values for abandoned projects and vehicles to be sold, recoverable salvage
values were determined using market estimates. Impaired assets to be sold are
primarily businesses to be sold (see Note 18) and surplus real estate. The
Company provides for losses in connection with long-term waste service contracts
where an obligation exists to perform services and when it becomes

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evident the projected direct and incremental contract costs will exceed the
related contract revenues. In general, these losses relate to contracts with
remaining average duration of five years.

The following is a summary of asset impairments and unusual items that are
reflected in the Company's consolidated financial statements for the year ended
December 31, 1998 (in millions):

Provision for losses on contractual commitments............. $115.6
Changes in estimates relating to the reassessment of
ultimate losses for certain legal and remediation
issues.................................................... 331.9
Write-down to estimated net sales proceeds of businesses to
be sold................................................... 195.1
Curtailment and settlement costs of terminating the defined
benefit pension plan (Note 11)............................ 34.7
Compensation charges for the liquidation of WM Holdings'
Supplemental Executive Retirement Plan (Note 11) and other
supplemental plans........................................ 72.2
Put provisions of certain WM Holdings' stock options as a
result of change in control provisions.................... 114.6
------
Total............................................. $864.1
======

In 1998, the Company increased its reserves for certain legal and
environmental remediation issues as a result of management's emphasis to resolve
and settle certain issues relating primarily to WM Holdings, including a class
action securities litigation against WM Holdings.

Certain WM Holdings' employee stock option plans included change of control
provisions that were activated as a result of the WM Holdings Merger whereby the
option holder received certain put rights that require charges to earnings
through the put periods. The charge to pre-tax earnings as a result of these put
rights was $114,600,000 in the third quarter of 1998. To the extent the future
market value of the Company's common stock exceeds $54.34 per share, the Company
will be required to record additional charges to earnings through July 16, 1999,
at which time all put rights expire. The expense related to these stock option
put rights has no impact to equity as the offset is a direct increase to
additional paid-in capital, as these put rights will be satisfied by the
issuance of stock.

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The following is a summary of asset impairments and unusual items reflected
in the Company's consolidated financial statements for the year ended December
31, 1997 (in millions):

Asset impairments:
Landfills, related primarily to management decisions to
abandon expansions and development projects due to
political or competitive factors, which will result in
closure earlier than previously expected (includes
$233.8 for hazardous waste sites)...................... $ 592.9
Hazardous waste facilities, resulting from continuing
market deterioration, increased competition, excess
capacity and changing regulation....................... 131.4
Goodwill, primarily related to landfills and hazardous
waste facilities impaired (including $411.0 related to
hazardous waste business).............................. 433.4
Write-down of WTI long-lived assets, including $47.1
related to a wood waste burning independent power
production facility.................................... 57.2
Recycling investments, related primarily to continued
pricing, overcapacity and competitive factors.......... 21.5
Write-down to estimated net realizable value of trucks to
be sold as a result of new fleet management policy
(Note 4)............................................... 70.9
Write-down to estimated net sales proceeds of businesses
to be sold (Note 18)................................... 122.2
Abandoned equipment and facilities........................ 37.3
Surplus real estate....................................... 38.2
Provisions for losses on contractual commitments............ 120.2
Severance for terminated employees.......................... 41.6
Special charge for WM International, primarily costs of
demobilization in Argentina following the expiration of
the City of Buenos Aires contract, divestiture or closure
of underperforming businesses (primarily in Italy and
Germany) and abandonment of projects (primarily in
Germany).................................................. 104.3
--------
Total............................................. $1,771.1
========

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The following is a summary of asset impairments and unusual items reflected
in the Company's consolidated financial statements for the year ended December
31, 1996 (in millions):

Asset impairments:
Landfills, related primarily to management decisions to
abandon expansion projects due to political or
competitive factors, which will result in closure
earlier than previously expected....................... $ 20.4
Recycling investments, related primarily to pricing,
overcapacity and competitive factors................... 47.8
Other, primarily equipment to be scrapped................. 2.0
Surplus real estate....................................... 1.5
Write-down to estimated net sales proceeds of businesses to
be sold................................................... 28.9
Reserves for certain litigation and for reengineering of
finance and administrative functions...................... 154.1
Provisions for losses on contractual commitments............ 53.6
Western retirement benefits................................. 4.8
Special charge for WM International:
Loss on sale of investment in Wessex Water Plc............ 47.1
Revaluation of investments in France, Austria, and Spain
in contemplation of exiting all or part of these
markets or forming joint ventures and write-off of a
hazardous waste disposal facility in Germany with
volumes adversely affected by regulatory changes....... 169.6
--------
Total............................................. $ 529.8
========

15. EARNINGS PER SHARE

The following reconciles the number of common shares outstanding at
December 31 of each year to the weighted average number of common shares
outstanding and the weighted average number of common and dilutive potential
common shares outstanding for the purposes of calculating basic and dilutive
earnings per common share, respectively (in thousands):

Diluted earnings per common share for the years ended December 31, 1998,
1997, and 1996 has been calculated excluding the effects of the Company's
convertible subordinated notes and debentures as inclusion of such items would
be anti-dilutive for these periods.

At December 31, 1998, there were approximately 73,600,000 common shares
potentially issuable with respect to stock options, warrants, and convertible
debt, which could dilute basic earnings per share in the future.

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16. COMPREHENSIVE INCOME

Comprehensive income is defined as the change in equity of a business
enterprise from transactions and other events and circumstances from nonowner
sources and includes all changes in equity except those resulting from
investments by owners and distributions to owners. The components of accumulated
other comprehensive income are as follows for the periods indicated (in
thousands):

Operating leases -- The Company leases many of its operating and office
facilities for various terms. Lease expense aggregated $194,846,000,
$189,873,600, and $186,270,000 during 1998, 1997 and 1996, respectively. These
amounts include rents under long-term leases, short-term cancelable leases and
rents charged as a percentage of revenue, but are exclusive of financing leases
capitalized for accounting purposes.

The long-term rental obligations as of December 31, 1998, are due as
follows (in thousands):

Financial instruments -- Letters of credit, performance bonds and other
guarantees have been provided by the Company supporting tax-exempt bonds,
performance of final landfill closure and post-closure requirements, insurance
contracts, and other contracts. Total letters of credit, performance bonds,
insurance policies, and other guarantees outstanding at December 31, 1998,
aggregated approximately $3,940,719,000. The insurance policies are issued by a
wholly-owned insurance company subsidiary, the sole business of which is to
issue such policies to customers of the Company and its subsidiaries. Because
virtually no claims have been made against these financial instruments in the
past, management does not expect these instruments will have a material effect
on the Company's consolidated financial statements.

In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk, such as bank letters of credit,
performance bonds and other guarantees, which are not reflected in the
consolidated balance sheets. Such financial instruments are to be valued based
on the amount of exposure under the instrument and the likelihood of performance
being required. In the Company's experience, virtually no claims have been made
against those financial instruments. Management does not expect any material
losses to result from these off-balance sheet instruments.

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Environmental matters -- The continuing business in which the Company is
engaged is intrinsically connected with the protection of the environment. As
such, a significant portion of the Company's operating costs and capital
expenditures could be characterized as costs of environmental protection. Such
costs may increase in the future as a result of legislation or regulation,
however, the Company believes that in general it tends to benefit when
environmental regulation increases, which may increase the demand for its
services, and that it has the resources and experience to manage environmental
risk.

As part of its ongoing operations, the Company provides for estimated final
closure and post-closure monitoring costs over the estimated operating life of
disposal sites as airspace is consumed. The Company has also established
procedures to evaluate potential remedial liabilities at closed sites which it
owns or operated or to which it transported, waste including 88 sites listed on
the NPL as of December 31, 1998. Where the Company concludes that it is probable
that a liability has been incurred, provision is made in the financial
statements.

Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate cost of remediation
require a number of assumptions and are inherently difficult, and the ultimate
outcome may differ from current estimates. However, the Company believes that
its extensive experience in the environmental services industry, as well as its
involvement with a large number of sites, provides a reasonable basis for
estimating its aggregate liability. As additional information becomes available,
estimates are adjusted as necessary. While the Company does not anticipate that
any such adjustment would be material to its financial statements, it is
reasonably possible that technological, regulatory or enforcement developments,
the results of environmental studies, the existence and ability of other
potentially responsible third parties to contribute to the settlements of such
liabilities, or other factors could necessitate the recording of additional
liabilities which could be material.

Litigation -- In November and December 1997, several alleged purchasers of
WM Holdings securities (including but not limited to WM Holdings common stock),
who allegedly bought their securities between 1996 and 1997, brought 14
purported class action lawsuits against WM Holdings and several of its former
officers in the United States District Court for the Northern District of
Illinois. Each of these lawsuits asserted that the defendants violated the
federal securities laws by issuing allegedly false and misleading statements in
1996 and 1997 about WM Holdings' financial condition and results of operations.
Among other things, the plaintiffs alleged that WM Holdings employed accounting
practices that were improper and that caused its publicly filed financial
statements to be materially false and misleading. The lawsuits demanded, among
other relief, unspecified compensatory damages, pre- and post-judgement
interest, attorneys' fees, and the costs of conducting the litigation. In
January 1998, the 14 putative class actions were consolidated before one judge.
On May 29, 1998, the plaintiffs filed a consolidated amended complaint against
WM Holdings and four of its former officers. The consolidated amended complaint
seeks recovery on behalf of a proposed class of all purchasers of WM Holdings
securities between May 29, 1995, and October 30, 1997. The consolidated amended
complaint alleges, among other things, that WM Holdings filed false and
misleading financial statements beginning in 1991 and continuing through October
1997 and seeks recovery for alleged violations of the federal securities laws
between May 1995 and October 1997. In December 1998, the Company announced an
agreement to settle the consolidated action against all defendants and the
establishment of a settlement fund of $220,000,000 for the class of open market
purchasers of WM Holdings equity securities between November 3, 1994, and
February 24, 1998. The settlement agreement with the plaintiffs is subject to
various conditions, including preliminary approval by the Court, notice to the
class and final approval by the Court after a hearing. There can be no
assurances that the Court will find the settlement to be fair to the class or
that, because members of the class may opt out of the lawsuit, WM Holdings will
not be a party to additional lawsuits or claims brought by individuals.

The Company is aware of another action arising out of the same set of facts
alleging a cause of action under Illinois state law. Additionally, there are
several other actions and claims arising out of the same set of

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facts, including one purported class action brought by business owners who
received WM Holdings shares in the sales of their businesses to WM Holdings that
alleges breach of contract causes of action on the basis of allegedly false
representation and warranties. A purported derivative action has also been filed
by an alleged former shareholder of WM Holdings against certain former officers
and directors of WM Holdings and nominally against WM Holdings to recover
damages caused to WM Holdings as a result of the matter described in this
paragraph. It is not possible at this time to predict the impact this litigation
may have on WM Holdings or the Company nor is it possible to predict whether any
other suits or claims arising out of these matters may be brought in the future.
However, it is reasonably possible that the outcome of any present or future
litigation may have a material adverse impact on their respective financial
condition or results of operations in one or more future periods. WM Holdings
intends to defend itself vigorously in the litigation.

The Company is also aware that the Securities and Exchange Commission has
commenced a formal investigation with respect to the WM Holdings previously
filed financial statements (which were subsequently restated) and related
accounting policies, procedures and system of internal controls. The Company
intends to cooperate with such investigation. The Company is unable to predict
the outcome or impact of this investigation at this time.

On March 12, 1998, a stockholder of WM Holdings filed a purported class
action suit in the Chancery Court of the State of Delaware in the New Castle
County against WM Holdings and certain of its former directors. The complaint
alleges, among other things, that (i) the Merger was the product of unfair
dealing and the price paid to members of the purported class for their WM
Holdings common stock was unfair and inadequate, (ii) the WM Holdings Merger
will prevent members of the purported class from receiving their fair portion of
the value of WM Holdings' assets and business and from obtaining the real value
of their equity ownership of WM Holdings, (iii) defendants breached their
fiduciary duties owed to the members of the purported class by putting their
personal interests ahead of the interests of WM Holdings' public stockholders
and (iv) the members of the class action will suffer irreparable damage unless
the defendants are enjoined from breaching their fiduciary duties. The complaint
seeks equitable relief that would rescind the WM Holdings Merger and monetary
damages from the defendants for unlawfully gained profits and special benefits.
The Company believes the suit to be without merit and intends to contest it
vigorously.

In the ordinary course of conducting its business activities, the Company
becomes involved in judicial and administrative proceedings involving
governmental authorities at the foreign, federal, state and local level,
including, in certain instances, proceedings instituted by citizens or local
governmental authorities seeking to overturn governmental action where
governmental officials or agencies are named as defendants together with the
Company or one or more of its subsidiaries, or both. In the majority of the
situations where proceedings are commenced by governmental authorities, the
matters involved relate to alleged technical violations of licenses or permits
pursuant to which the Company operates or is seeking to operate or laws or
regulations to which its operations are subject or are the result of different
interpretations of the applicable requirements. From time to time, the Company
pays fines or penalties in environmental proceedings relating primarily to waste
treatment, storage or disposal facilities. The Company believes that these
matters will not have a material adverse effect on its results of operations or
financial condition. However, the outcome of any particular proceeding cannot be
predicted with certainty, and the possibility remains that technological,
regulatory or enforcement developments, the results of environmental studies or
other factors could materially alter this expectation at any time.

From time to time, the Company and certain of its subsidiaries are named as
defendants in personal injury and property damage lawsuits, including purported
class actions, on the basis of a Company subsidiary's having owned, operated or
transported waste to a disposal facility which is alleged to have contaminated
the environment or, in certain cases, conducted environmental remediation
activities at sites. Some of such lawsuits may seek to have the Company or its
subsidiaries pay the costs of groundwater monitoring and health care
examinations of allegedly affected persons for a substantial period of time even
where no actual damage is

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proven. While the Company believes it has meritorious defenses to these
lawsuits, their ultimate resolution is often substantially uncertain due to the
difficulty of determining the cause, extent and impact of alleged contamination
(which may have occurred over a long period of time), the potential for
successive groups of complainants to emerge, the diversity of the individual
plaintiffs' circumstances, and the potential contribution or indemnification
obligations of co-defendants or other third parties, among other factors.
Accordingly, it is possible such matters could have a material adverse impact on
the Company's consolidated financial statements.

The Company has been advised by the U.S. Department of Justice that Laurel
Ridge Landfill, Inc., a wholly-owned subsidiary of the Company as a result of
the Company's acquisition of United, is a target of a federal investigation
relating to alleged violations of the Clean Water Act at the Laurel Ridge
Landfill in Kentucky. The investigation relates to a period prior to the
Company's acquisition of United in August 1997. The Company is attempting to
negotiate a resolution with the government which may include a guilty plea to a
criminal misdemeanor, a fine and in-kind services. The Company believes that the
ultimate outcome of this matter will not have a material adverse effect on the
Company's consolidated financial statements.

In June 1996, an indictment was brought against All-Waste Systems, Inc.
("All-Waste"), an indirect subsidiary of the Company acquired in December 1998
in connection with the Eastern Merger, thirteen other corporations and seven
individuals in the Southern District of New York. In September 1997 nineteen of
the defendants entered guilty pleas and collectively agreed to pay $17,000,000
in restitution to the IRS and Westchester County, fines and civil forfeitures.
All-Waste pled guilty to mail fraud, which arose out of an alleged bid-rigging
scheme for the Town of New Windsor, paid an $85,000 fine and was sentenced to a
five year probation period. The probation period was terminated upon the closing
of the sale of All-Waste to Eastern in June 1998.

In March 1999, the Company was notified that All-Waste and two other
indirect subsidiaries acquired in the Eastern Merger as well as a current
employee of the Company were suspended from future contracting with any agency
in the executive branch of the U.S. Government pending proceedings. The
suspension and potential debarment are based on the September 1997 conviction of
All-Waste and activities that occurred prior to ownership of the entities by
Eastern. The Company is attempting to remove the three entities from the
suspension and proposed debarment list. The Company believes that the ultimate
outcome of this matter will not have a material adverse effect on the Company's
consolidated financial statements.

In February 1999, a San Bernardino County, California grand jury returned
an amended felony indictment against the Company, certain of its subsidiaries
and their current or former employees, and a County employee. The proceeding is
based on events that allegedly occurred prior to the WM Holdings Merger in
connection with a WM Holdings landfill development project. The indictment
includes allegations that certain of the defendants engaged in conduct involving
fraud, wiretapping, theft of a trade secret and manipulation of computer data,
and that they engaged in a conspiracy to do so. If convicted, the most serious
of the available sanctions against the corporate defendants would include
substantial fines and forfeitures. The Company believes that meritorious
defenses exist to each of the allegations, and the defendants are vigorously
contesting them. The Company believes that the ultimate outcome of this matter
will not have a material adverse effect on the Company's consolidated financial
statements.

The Company has brought suit against a substantial number of insurance
carriers in an action entitled Waste Management, Inc. et al. v. The Admiral
Insurance Company, et al. pending in the Superior Court in Hudson County, New
Jersey. In this action the Company is seeking a declaratory judgment that
environmental liabilities asserted against the Company or its subsidiaries, or
that may be asserted in the future, are covered by insurance policies purchased
by the Company or its subsidiaries. The Company is also seeking to recover
defense costs and other damages incurred as a result of the assertion of
environmental liabilities against the Company or its subsidiaries for events
occurring over at least the last 25 years at approximately 140 sites and the
defendant insurance carriers' denial of coverage of such liabilities. While the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company has reached settlements with some of the carriers, the remaining
defendants have denied liability to the Company and have asserted various
defenses, including that environmental liabilities of the type for which the
Company is seeking relief are not risks covered by the insurance policies in
question. The remaining defendants are contesting these claims vigorously.
Discovery is nearly complete as to the 12 sites in the first phase of the case
and discovery is expected to continue for several years as to the remaining
sites. Currently, trial dates have not been set. The Company is unable at this
time to predict the outcome of this proceeding. No amounts have been recognized
in the Company's consolidated financial statements for potential recoveries. See
Note 6.

Several purported class action lawsuits and one purported derivative
lawsuit seeking injunctive relief and unspecified money damages were filed in
the Chancery Court in and for New Castle County, Delaware against the Company,
WTI, and individual directors of WTI in connection with the June 20, 1997,
proposal by WM Holdings to acquire all of the shares of WTI common stock which
WM Holdings did not own. WM Holdings subsequently consummated a merger in which
WTI's stockholders received $16.50 in cash per share of WTI's common stock. The
lawsuits, which have since been consolidated into a single action, allege, among
other things, that the defendants breached fiduciary duties to WTI's minority
stockholders because the merger consideration contemplated by the proposal was
inadequate and unfair. The Company believes that the defendants' actions in
connection with the proposal were in accordance with Delaware law and, on that
basis, has agreed to a settlement providing for the dismissal of all of the
lawsuits against all defendants. The settlement agreement with the plaintiffs is
subject to various conditions, including notice to the putative class and
approval by the Court after a hearing.

The Company and certain of its subsidiaries are also currently involved in
other civil litigation and governmental proceedings relating to the conduct of
their business. While the outcome of any particular lawsuit or governmental
investigation cannot be predicted with certainty, the Company believes that
these matters will not have a material adverse effect on its consolidated
financial statements.

Tax Matters -- During the first quarter of 1995, WMI Sellbergs AB, a
Swedish subsidiary, received an assessment from the Swedish Tax Authority of
approximately 417,000,000 Krona (approximately $52,000,000) plus interest from
the date of the assessment, relating to a transaction completed in 1990. On
November 4, 1998, the County Court of the County of Stockholm ruled in favor of
WMI Sellbergs AB. However, the Swedish Tax Authority has appealed that decision.
The Company believes that all appropriate tax returns and disclosures were
properly filed at the time of the transaction and intends to vigorously contest
the appeal.

Insurance -- The Company carries a broad range of insurance coverages,
which management considers prudent for the protection of the Company's assets
and operations. Some of these coverages are subject to varying retentions of
risk by the Company. The casualty policies provide for $2,000,000 per occurrence
coverage for primary commercial general liability and $1,000,000 per accident
coverage primary automobile liability (including coverage for pollution exposure
arising out of trucking operations) supported by $400,000,000 in umbrella
insurance protection. The property policy provides insurance coverage for all of
the Company's real and personal property on a replacement cost basis, including
California earthquake perils. The Company also carries $200,000,000 in aircraft
liability protection.

The Company maintains workers' compensation insurance in accordance with
laws of the various states and countries in which it has employees. The Company
also currently has an environmental impairment liability ("EIL") insurance
policy for certain of its landfills, transfer stations, and recycling facilities
that provides coverage for property damages and/or bodily injuries to third
parties caused by off-site pollution emanating from such landfills, transfer
stations, or recycling facilities. At December 31, 1998, this policy provides
$10,000,000 of coverage per loss with a $20,000,000 aggregate limit.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Through the date of the WM Holdings Merger, certain of WM Holdings' auto,
general liability, environmental impairment liability, and workers' compensation
risks were self-insured up to $5,000,000 per accident. For such programs, a
provision was made in each accounting period for estimated losses, including
losses incurred but not reported, and the related reserves are adjusted as
additional claim information becomes available. Claim reserves are discounted at
5.5% and 6% at December 31, 1998 and 1997, respectively. The self-insurance
reserve included in the accompanying consolidated balance sheets is $277,400,000
and $226,700,000 at December 31, 1998 and 1997, respectively.

To date, the Company has not experienced any difficulty in obtaining
insurance. However, if the Company in the future is unable to obtain adequate
insurance, or decides to operate without insurance, a partially or completely
uninsured claim against the Company, if successful and of sufficient magnitude,
could have a material adverse effect on the Company's financial condition,
results of operations or cash flows. Additionally, continued availability of
casualty and EIL insurance with sufficient limits at acceptable terms is an
important aspect of obtaining revenue-producing waste service contracts.

18. ASSETS AND OPERATIONS HELD FOR SALE

Assets Held for Sale

The Company is disposing of certain assets to comply with governmental
orders related to the WM Holdings Merger and Eastern Merger and certain other
assets as a result of implementing the business strategy related to the WM
Holdings Merger. These businesses' results of operations are fully included in
revenues and expenses in the accompanying statements of operations, and
generated third party operating revenues of approximately $372,596,000 and
earnings before interest and taxes of approximately $20,600,000 in 1998. In
addition, as a result of the WM Holdings Merger, various real estate became
duplicative and surplus, and will be sold. As discussed in Notes 3 and 14, the
Company has recorded charges to write down these assets to fair value, less
costs to sell. These charges are based on estimates and certain contingencies
that could materially differ from actual results and resolution of any such
contingencies.

Operations Held for Sale

In the fourth quarter of 1995, the Company approved a plan to sell or
otherwise discontinue the process engineering, construction, specialty
contracting and similar lines of business of Rust International, Inc. ("Rust"),
a subsidiary owned 60% by WM Holdings and 40% by WTI. At December 31, 1996,
management also classified as discontinued and planned to sell Rust's domestic
environmental and infrastructure engineering and consulting business and
Chemical Waste Management, Inc.'s ("CWM") high organic waste fuel blending
services business. Also, WTI classified certain of its water process systems and
equipment manufacturing businesses (sold in 1996) and its water and wastewater
facility operations and privatization business (sold in 1997) as discontinued
businesses in 1996. Operating revenues from the discontinued business were
$84,800,000 in 1997, and $734,500,000 in 1996. Results of their operations in
1997 were included in the reserve for loss on disposition provided previously,
and such results were not material.

In 1997, management reclassified the CWM business back into continuing
operations, and classified certain of its sites as operations held for sale. The
Rust dispositions were not completed within one year, and accordingly, this
business was reclassified back into continuing operations held for sale, at
December 31, 1997, though management continued its efforts to market these
businesses. Because these business were reclassified to continuing operations,
the remaining provision for loss on disposal ($95,000,000 after
tax -- $87,000,000 related to Rust and $8,000,000 related to CWM) was reversed
in discontinued operations and an impairment loss for Rust of $122,200,000 was
recorded in continuing operations in the fourth quarter of 1997. Prior year
financial statements were restated. The majority of these assets were sold
during the second and third quarters of 1998, respectively, for amounts
approximately equal to their recorded net book values. Information

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

regarding the businesses presented in the consolidated statement of operations
as net assets of continuing operations held for sale is as follows (in
thousands):

The remaining assets and liabilities of these businesses were not material
at December 31, 1998. At December 31, 1997, related amounts are included in net
assets of continuing operations held for sale (long-term) in the accompanying
consolidated balance sheets, and consists of the following (including 73,300,000
of surplus real estate) (in thousands):

Basic and diluted earnings per common share for each of the quarters
presented above is based on the respective weighted average number of common and
dilutive potential common shares outstanding for each period and the sum of the
quarters may not necessarily be equal to the full year basic and diluted
earnings per common share amounts.

Amounts presented above are restated for certain pooling of interests
transactions as discussed in Note 3, and are different from amounts originally
reported. The results of operations for 1998 and 1997 include certain charges
for merger costs, asset impairments and unusual items, as disclosed in Notes 3
and 14. In 1998, such charges were $7,602,000, $7,361,000, $2,231,116,000, and
$425,229,000 in the first, second, third, and fourth quarters, respectively.
Such items charged to expense in the first, second, third and fourth quarters of
1997 were $27,660,000, $52,922,000, $158,113,000 and $1,645,198,000,
respectively.

20. SUBSEQUENT EVENTS

Financing Transactions

In March 1999 the Company called its 5% convertible subordinated debentures
(due March 1, 2006). These debentures were subsequently converted into shares of
the Company's stock by the debentures holders. If the subordinated debenture
conversion occurred on January 1, 1998, diluted earnings per share would have
been increased by $0.01 for 1998.